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I propose the following: forward-thinking law firms should create a FREE legal library that includes AT LEAST the items listed above. The should GIVE this library to start-ups that agree to become clients after a funding event of a particular size…maybe $250k or more. To be clear: I’m suggesting that law firms loss-lead with this free legal library and win clients that may become the next Google (or, realistically, may also go out of business). It’s time for the supply chain to evolve. we're starting to see some standardization of termsheets...now let's continue the thought.

Posted by
raisecapital
on 2009-07-14

In California, 25501.5 of the Corporations Code gives any person who purchases a security from, or sells a security to, a broker-dealer that is required to be licensed, but is not, the right to bring an action for rescission of the purchase or sale, or if already sold, for damages. Five year statute of limitations, or two after discovery, which ever is first.

1029.8 of the Code of Civil Procedure was amended to cover people who should be licensed as a broker-dealer, but who are not and take a commission for selling securities.

The purchaser can sue the "finder" for damages, and may recover treble damages (limited to $10,000 above the purchase price) and may be awarded attorneys fees and costs.

Most important, the law give the investor the right to rescind their investment (get their capital back) for two years, which puts the capital at risk for that period of time. That may make additional rounds more difficult to raise.

So the finder is, in fact, guaranteeing the investment.

Has anyone run into this in fund raising? Have they asked the finder about it? Has anyone recouped their investment or known of someone who did using this law?

By the way, it is my understanding that this doesn't apply to officers of the corporation.